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Check book control of IRA


Guest valerie4975
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Guest valerie4975

I am setting up an IRA to invest in real estate. I have decided on a self directed IRA custodian but I want to go one step further. I want checkbook control of my IRA.

I have been told that I can do this by setting up an LLC of which the IRA is the beneficiary and then transferring the assets to the LLC. The companies that help with this set up charge about $4,000 which seams like an aweful lot for setting up an LLC. Of course these companies state that the LLC has to be set up corecctly to avoid full distribution of the IRA - enough to scare me out of trying it myself. But there must be another altrnative - I can't believe there is some secret knowledge imparted only to these particular type of advisors. I have no problem paying a competant CPA to help me with this but am not sure if the $4,000 is a little much.

I was also told that you could also get checkbook control by setting up a trust. I appoint a trustee (unrelated party) who would write the checks as I see fit.

By doing this I accomplish 1) avoid having to go to the custodian each time I need to have a check drawn 2) avoid paying fees for them to review each request and cut a check. Another advantage is that I can place the assets where I think they will be the safest.

Thanks for any input you may have.

Val

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Most of what you describe sounds like playing with fire. Start by hiring that competent independent advisor. If you don't want the to spend the money up front to get a better sense of the proposition, you don't have enough money for the investment activities that you are proposing. A bad arrangement will do worse than nullify all of your investment success.

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You are right.. There is no "secret knowledge imparted only to these particular type of advisors." Especially any that is worth $4,000.

From what you posted, I agree that it sound like you would be playing with fire. Without more details, my first impression is that it smells.

Get your self a competent advisor experienced with this issue and in the taxation of IRAs in particular.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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V- How do you transfer funds from an IRA to an LLC without a taxable distribution from the IRA? Dont you mean that the IRA will own 100% of initial offer of stock of the LLC in return for investing IRA funds in the LLC which will own the RE? The income from the RE will be held by the LLC to pay expenses. Most IRA custodians will not allow investments in RE or privately held corps so you will have to pay high annual fees to those few custodians that will allow investment in an LLC. Investing IRA funds in RE results in the loss of many tax breaks that are available to taxpayers including depreciaton, cap gainsand deduction of operating expenses. Finally how will you pay the expenses of the RE if there is not enough cash in the LLC?

mjb

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MBozek, I agree with all of your points.

There is a tendancy for folks to look on the other side of the fence and see greener grass. If it isn't real estate, its options, ADRs, hedge funds, etc. Almost every time this has come up, the original author has given no clues that they really know much about the area or have the assets to take higher risks is specialty investments. The above investments are just not suitable for the average household. If you disagree, apply this test. Can you stand up now without notes and give a quality talk for 30 minutes about any of these investments? You don't need that level of knowledge to participate in mutual funds.

I don't want tax payers who read messages here to be mislead. Stick with basic investing... stocks, bonds, cds, mutual funds, index funds, etc. You can get reasonable results from these types of investments without getting hit with high fees or exposing your assets to abnormal risks. The three big keys to investing are: diversification, taking on reasonable risks (equities favored over IOUs if you have decades to go) and time. A good investor pays little attention to day to day flucuations in stock prices but focused on years/decades. Time is need to get compounding to work for you.

The average person can not cut corners and expect great results. Cutting corners usually means betting on long shots. Looking to esoteric investments that you might not fully understand is no solution.

If you are in your 20s, 30s or 40s you have a lot of time to build your retirement assets. Have confidence in a reasonable plan and over time you will be pleased.

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Guest valerie4975

Thank you for your feedback.

QDROphile

I never said I do not want to spend the money. I just thought that the amount seems exorbitant and wanted to see what the professionals thought. I am beginning to see that the amount may be fair as not many seem to be aware of this kind of structure.

GBurns

Finding a competent advisor is exactly why I came here. I would not try to structure this myself - I have too much at stake. In another post I asked if anyone knew of a good directory for CPA's but did not get any meaningful feedback.

mbosek

The structure you outline is what I am referring to. I need to hire an advisor that will help me with this structure. Entrust allows this type of structure and yes they do charge fees. I understand that you lose the depreciation etc. Part of the investment decision will include making sure the IRA has adequate reserves to pay any costs associated with the real estate investment.

John G

Real estate is a legitimate investment vehicle. You said "Looking to esoteric investments that you might not fully understand is no solution". Since when is real estate an esoteric form of investing? Your tone is completely condescending and you assume allot. I understand real estate investing but do not have enough knowledge about structuring my IRA to facilitate my investing and I came here to get some direction on that.

Valerie

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Valerie, Let me give you some perspective on my comments. I have been posting here for over 5 years. During that time we have probably had 30+ questions come up about unusual investments (some allowed in Roths, some not) and I don't remember a single time when the author provided any evidence of substantial experience in the field. My "esoteric" comment was made in the context of the array of alternatives that have been proposed and was made in a larger context than real estate.

Of course, real estate is a viable investment. It is modest part of my investments including LLCs in Washington/LA and some condos. I know the process/math. Your question was not the viability of real estate, but specifically using a IRA. I concurred with Mbozek's cautions and my remarks extended beyond his points.

There are two audiances on this message board, the specific author and the general public that also reads the answers. You gave use very little information about yourself, so I chose to address the larger issue of chasing performance by reaching for esoteric investments. For the bulk of the people who read this message board, real estate investments in a IRA or Roth just won't work.

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valerie,

I said "Get your self a competent advisor experienced with this issue and in the taxation of IRAs in particular."

I said nothing about CPAs. It would be your decision to use a CPA if you feel that CPAs (as a general term) meet the criteria stated.

There is nothing factual or logical that makes a CPA knowledgeable about taxes or IRAs solely by being a CPA.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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To do this right you will need more than one advisor. You will need a lawyer to set up the LLC and prepare documents and also to advise you on the Prohibited Transactions aspects of using RE in an IRA since very few CPAs give such advice. There are complex tax questions on using your own IRA funds to set up a corp since an IRA owner is generaly prohibited from purchasing an interest from her own IRA. You will need a tax preparer/cpa to prepare the necessary tax forms for the LLC and if necessary the IRA. Unless you use borrowed money to finance the deals you wont need much tax advice on investing RE in the IRA since the transactions will be tax free (Of course if you use a Roth IRA you will have tax issues once you withdraw an amount in exccss of you contributions). All distributions from a deductible IRA are taxed as ordinary income. Some expenses may be paid by the IRA sponsor and deducted on your 1040. The advisors will charge on an hourly basis because they do not know how much work will be involved in advising you on your investments. The cost of getting advice may be a significant expense which will offset gains from the sales.

mjb

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Mbozek, you raise a good point. Not only do you lose some of the tax writeoffs if your RE investments are in an IRA, but you also give up the option for long term capital gains. All gains coming out of an IRA are taxed as ordinary income.

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Guest telarsen

Valerie,

I like your guts and idea to invest in a self-directed IRA! I think you may be talking to the wrong "Custodian" to do this. While it is true you must send them a "direction of investment" to disburse your funds, these small fees certainly won't add up to $4,000! They have overnighting features, which you may pay $40!

I would check out www.trustetc.com or www.penso.com or www.guidant.com

Interview them like you would any advisor and you can do this on your own, with some self-education on your part.

Good luck!

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Te- have you seen the seen schedue at trustetc? The annual fee starts at $185 for accounts with a FMV of less the 15k and goes up to $1850 for accounts with 1m. The fee for a 100k account is $425 a year. There is also a $50 set up fee. Any custodian who allows investment in unconventional assets such as RE and non public securities will charge a large annual fee to pay for the cost of insurance to protect the trustee in the event of law suits for negligence, environmental liability (RE) or other claims.

mjb

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Guest telarsen

mbozek,

I know what your saying on the fees but IRS are judgement proof, so why bother with attorney fees and LLC costs? The fees trustetc will be far less that any attorney will cost! And that was my point, pay-as-you-go fees, as opposed to larger up front costs that an attorney would charge.

Attorney's are great but not needed in this transaction in my opinion.

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Telarsen - I disagree on getting up front advice.

The risks you could face from undertaking an illegal transaction are huge. What seems to a normal person a simple transaction could from the IRS's point of view destroy the tax shelter Roth, have the entire account treated as a dispursement and trigger penalties. No one with modest Roth or IRA assets should even consider any of these unusual investment approachs. No one unwilling to get or pay for expert advice on the legality and structure of these alternatives should consider these investment approachs. There is no rebuttal to the question of "why did you not get legal/accounting advice?". As you will note with all kinds of unusual transactions involving IRA/Roths (such as participating in IPOs), the first thing the custodian asks you to sign is a waiver form saying that you did not rely upon them for tax advice and were encouraged to seek professional advice. Now, if there are no problems with these kinds of transactions.... why do you thing the custodians want you to sign these special waivers?

I will extend this suggestion to anyone who is also considering any large IRA conversion or other special transaction. Get good advice up front. It some cases getting advice from two sources makes sense.

I am not some risk adverse and fearful person. I have seen too many large dollar deals (FISBOs, land purchases, Roth conversions, partnerships, and incorporations) where either foolish frugality or self-deception about expertise has sown the seeds for messy transactions that have caused pain. I have observed that at a minimum, advice from a professional gives you a second opinion. It also gives you some financial/legal protection if the advice you receive is incorrrect.

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Guest telarsen

I agree with your comments, John but let me give you a real life example.

One year ago, I borrowed $25,000 from a retired client, backed by my new office building - terms 9% for 7 years. Now what if he did that through a Roth IRA instead of personally? TAX FREE income!

He could have easily set this up from someone like trustetc and all my payments to his Roth IRA account would grow TAX FREE.

In my situation he would not need an attorney to do this simple transaction. That is my point.

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I agree with John. This is not some play money account, this is your retirement. You should make sure that everything is done properly from the beginning.

As for telarsen, all IRA investments provide TAX FREE income and grow TAX FREE. It is irresponsible to suggest that one not get an attorney to help properly document and structure a loan to an unrelated party, much less one out of an IRA.

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telarsen

Was the money from a retired client or was it from a Roth IRA owned by the retired client? They are 2 very different things.

Most people are advised to get legal help when entering into any major contract such as buying real estate. Buying or financing a deal such as you described is no different from becoming a mortgage lender. Certainly legal advice would be prudent in this case.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Warren Buffet has a favorte phrase "A fool and his money are soon parted." I dont know why any investor would loan money to finance the purchase of RE without having the documents reviewed by counsel. Lending IRA funds to invest in RE requires that all of the legal formalities for RE investments be observed including acquiring a secured interest in the RE since the loan is a contract between private parties which is not regulated by Govt entites like securities transactions. Organizations like trustetc provide administration, recordkeeping and trust services but do not prepare or review legal documents for clients.

mjb

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Consider the following statement:

"One year ago, I borrowed $25,000 from a retired client, backed by my new office building - terms 9% for 7 years. Now what if he did that through a Roth IRA instead of personally? TAX FREE income"

This statement raises more questions than it answers....

1. Why would you pay above market rates to get $25,000 when you could walk into most banks and probably get a loan at either a lower rate or perhaps longer period of time? A year ago, I think I could get a secured loan for $25,000 with an interest rate between 5 and 6% with zero fees or points. You said "new" office building - if you are talking about new construction, why not completely finance the building at market rates? A year ago, an unsecured signature line of credit for 25k did not even carry a 9% interest rate.

2. Flip side - why should your client take on additional risks of a small loan when he has options in the open market for corporate notes at roughly the same rate that are more liquid and backed by larger companies?

3. You said "client". This implies either a professional relationship or a fiduciary duty or both. It raises concerns about "arms length transaction". I generally recommend against mingling financial relationships with professional advice to avoid blurring the lines of whose interests are represented. It is not clear that your client was getting the best deal or that the "investment" was a good fit from the client. You leave yourself open to litigation if anything goes wrong since you had got a financial gain from the transaction.

4. "TAX FREE" - as already noted, nothing extraordinary about this.

My conclusion: I think both parties could have gotten a better deal in the open market. There is nothing special in what you proposed or did. And, the transaction has clearly more risks than an open market transaction.

I would very explicitly NOT recommend someone with a Roth to undertake a loan like the one you suggested. You can clearly do just as well in the open market without incurring additional risk or additional cost. I would not recommend anyone undertake a financial deal with their advisor without getting legal opinion, and probably not even if it was cleared with their attorney.

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